Iran threatens to halt India oil supplies

New Delhi, July 2, 2011

Iran has threatened to halt oil supplies to India in August as it presses New Delhi to solve a payments dispute that has cast a shadow since December over the two countries' $12 billion annual crude trade.

National Iranian Oil Co (NIOC), the state oil firm that supplies around 12 per cent of India's oil imports, set the deadline in a letter dated June 27 to Indian refiners, sources at the refiners and NIOC told Reuters on Friday.

But Iran might be leery of losing market share in its second-biggest customer with Saudi Arabia already offering India up to 2.6 million barrels - some 3 per cent of the fast-growing Asian giant's imports - as extra supplies for July.

'It's just their way of trying to put the ball back in the court of the Indian government so that they make a decision, because they don't want to be left hanging,' said Praveen Kumar, head of South Asia oil and gas consulting at Facts Global Energy.

'This is not something that the Iranians would like to do.'

Iran, facing increased isolation internationally, and energy-hungry India have been looking to resolve an impasse triggered in December when the Reserve Bank of India ended a regional clearing mechanism under US pressure.

'This is the first time they have written a letter to halt supplies, otherwise they were regular. We hope that a decision on a new payment mechanism would be taken by mid-July,' a source at state-owned Mangalore Refinery and Petrochemical Ltd (MRPL) said.

Two Iranian industry officials confirmed sending a letter to Indian refiners.

'We regret to inform you that NIOC would hardly be in a position to deliver the Iranian crude oil to our partners in India ... in August 2011 unless concrete solutions are worked out for remittances of NIOC's dues,' the letter said, according to two sources who have seen it.

A source at NIOC said it hoped to reach a solution soon.

'We have a very good relationship with all the refiners in India,' said the NIOC source. 'We want to come to a agreement on this problem.'

Feeling pinch

Analysts say Iran is putting pressure on India to accelerate the resolution of the payments mechanism dispute.

India owes Iran $2 billion for oil imports in recent months, Seyed Mohsen Ghamsari, executive director for international affairs at NIOC said on May 31 after a meeting with Indian officials in New Delhi.

'Iran has really been feeling the cash flow pinch recently from not having received most of the payments for Indian exports for many months now, so it is perhaps not surprising they are trying to pressure their counter parties into finding a solution,' said Samuel Ciszuk, senior Mena Energy Analyst at IHS Energy.

'Iran is putting pressure on the Indian government. But Saudi is there to offer additional volume ... So if Iran loses India, it is a loss of a big chunk of the market and it can be a double whammy for Iran.'

Saudi Arabia is lifting output after Iran and others blocked a wider oil supply boost at the June 8 meeting of the Organization of Petroleum Exporting Countries.

A source at Hindustan Petroleum Corp said his company would increase supplies from term volumes instead of tapping the spot markets if Iran cut off shipments.

Earlier this year, Germany allowed India to pay for the oil via Hamburg-based EIH bank, which handles international trade for Iranian companies.

But India halted that conduit in early April after discussions with German Chancellor Angela Merkel, and EIH has since come under EU sanctions.-Reuters